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Friday, 21 November 2014 00:00
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Need to relook norms after Kerala, UMPP fiasco


Any new norms, at the end of the day, have to improve the existing system, not wreck it further. The new norms put in place by the government, it is true, try to fix some of the egregious wrongs of the past—forcing companies to take a call on fuel costs for 25 years was one such; another was, in the case of the ultra-mega power plants (UMPPs), not being able to oust a developer if it did not supply power as per the agreed norms. The problem, however, is that the new norms haven’t been able to address all the problems. So, last month, private bidders indicated that they would not be able to bid for the two new UMPPs being put out for bidding. A few weeks ago, when the Kerala government asked for bids, the winning put its fixed costs at 72% of the total tariff—the average of the past few years has been in the region of around 35%. Company officials as well as analysts point out that since there are so many unknowns, such as delays in availability of raw materials, bidders don’t want to take any chances and are loading as many risks as possible onto the fixed costs itself. In the case of the UMPPs, the grouse was that the bidding document was loaded against developers who were expected to put in money without even owning the projects—the power producers said there were 27 events of default for the developer and just 3 events for the buyer or the utility.

With almost all the 55,000 MW of power plants that have come up over the past few years by way of competitive bidding in some form of tariff trouble, it is not surprising power generators are not responding as enthusiastically as in the past. It doesn’t help that, while overall losses in the sector are supposed to have come down to R71,000 crore in FY14, from R93,000 crore in FY12, this does not include at least R50,000 crore of regulatory assets, or amounts due to power suppliers. What makes it worse is that the financial restructuring package (FRP) appears to be a non-starter, and states like Uttar Pradesh have cross-subsidy levels as high as 80% and transmission and distribution losses of well over 40%. At a time when the government needs to work very hard with both the states as well as with regulators, it may be a good idea to go back to the old rate-of-return-based regulation of power plants. As the sector improves, and there is more certainty in availability of fuel as well as less government delays, we can return to the competitive bidding route.



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